While the Fed will certainly continue to watch inflation - making sure that it continues to move lower toward its long-term goal of 2.0 percent - it is now looking more closely at the job market.

The August consumer price index rose by 0.2 percent in August, with the 12-month trend rate up by 2.5 percent - just as market participants expected. Slower increases in food prices (up by 0.1 percent) and declines in energy prices (down by 0.8 percent) helped to moderate the CPI.

But the core CPI (removing the volatile food and energy components) increased by 0.3 percent - a tad above market expectations of 0.2 percent. As a result, the trend rate edged higher to 3.3 percent. Shelter costs again increased at a rapid rate, up by 0.5 percent for the month, despite market signals showing slowing gains. At some point, we should start to see the shelter costs rise at a slower pace, and that will help slow the increases in the core CPI - but it's not clear when that will occur.

The trend in overall inflation remains modestly downward, although the core rate appears to have flattened out. It is likely that inflation will continue to drift lower in the coming months as the economy slows and lower energy prices make their way into other prices.

The recent flattening of core prices, however, will likely keep the Fed from easing by 50 basis points at next week's FOMC meeting. While the Fed will certainly continue to watch inflation - making sure that it continues to move lower toward its long-term goal of 2.0 percent - it is now looking more closely at the job market (which is slowing but is not weak). We look for a 25bps cut in the federal funds rate next week, but with guidance that this is the start of a long process of rate normalization - bringing the federal funds rate down over time to its neutral rate (probably around 3.0 percent). But if the job market weakens significantly, the Fed will be prepared to ease policy faster (and if inflation fails to drop further, or even increases, the Fed would likely pause easing).

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.